Nittler v. Commissioner

• Decision Date: 01 November 1979
• Docket Number: 8739-74,113-74,Docket No. 112-74,466-77.,8738-74
• Citation: 1979 TC Memo 440,39 TCM (CCH) 422
• Parties: Alan H. Nittler and Dorothy L. Nittler, et al. v. Commissioner.
• Court: U.S. Tax Court

39 TCM (CCH) 422

1979 TC Memo 440

T.C. Memo. 1979-440.

Alan H. Nittler and Dorothy L. Nittler, et al.¹ v. Commissioner.

Docket Nos. 112-74, 113-74, 8738-74, 8739-74, 466-77.

United States Tax Court.

Filed November 1, 1979.

Robert H. Weir and Sam Kornhauser, 93 W. Julian St., San Jose, Calif., for the petitioners. Joyce Elaine Britt, for the respondent.

Memorandum Findings of Fact and Opinion

WILES, Judge:

Respondent determined the following deficiencies in petitioners' Federal income tax:

                ______________________________________________________________________________________________________________
                                                                                         Addition to Tax
                                                    Docket   Taxable                    Sec. 6651   Sec. 6651
                Petitioners                          No.       Year        Deficiency    (a)(1)2      (a)(2)
                ______________________________________________________________________________________________________________
                     Alan H. Nittler and            112-74     1967       $ 8,615.59
                     Dorothy L. Nittler                        1968        20,536.00*
                                                               1969        14,356.00*
                                                               1970        17,198.00*
                     Dorothy L. Nittler,            113-74   11/16/67-
                     Christina Allan Rustigan,               11/30/68      23,987.91
                     and Alan H. Nittler, Trustees           11/30/68      14,976.77
                     of the Alan H. Nittler, M.D.            11/30/70      18,977.74
                     Medical Office Trust
                     Dorothy L. Nittler,           8738-74   11/30/71       1,279.00    $288.00     $217.00
                     Christina Allan Rustigan
                     and Alan H. Nittler, Trustees
                     of the Alan H. Nittler, M.D
                     Medical Office Trust
                     Alan H. Nittler and           8739-74     1971        19,821.00*
                     Dorothy L. Nittler                        1972        30,644.00*
                     Alan H. Nittler and            466-77     1973        42,554.00
                     Dorothy L. Nittler                        1974        56,339.00
                ______________________________________________________________________________________________________________
                  * By amending his answer, respondent increased the deficiency he originally asserted by statutory
                notice
                

There are six issues before this Court.³

1. Whether Lahai Roi Foundation, a California corporation, was a separate taxable entity from 1968 through 1974, and, if so, whether it or petitioners should be treated as the beneficial owner(s) of ranch property.

2. Whether Alan H. Nittler's transfer of his medical practice to the Alan H. Nittler, M.D. Medical Office Trust was an assignment of income taxable to him as an individual.

3. Whether Lahai Roi Foundation or the Alan H. Nittler, M.D. Medical Office Trust qualify as a tax-exempt organization within section 501(c)(3) and, if so, whether petitioners or the Alan H. Nittler, M.D. Medical Office Trust are entitled to deductions under section 170 for contributions made to one or both organizations.

4. Whether Dorothy L. Nittler was engaged in the activity of horsebreeding for profit during the years at issue.

5. The amount of business expense deductions petitioners are entitled to for the taxable years at issue.

6. Whether section 6651(a)(1) and (2) penalties should be imposed on the Alan H. Nittler, M.D. Medical Office Trust.

Findings of Fact

Some of the facts have been stipulated and are found accordingly.

Alan H. Nittler and Dorothy L. Nittler (hereinafter petitioners), husband and wife, resided in Aptos, California, when they filed their 1967 return with the District Director at San Francisco, California; their 1968, 1969, 1970 and 1971 returns with the Western Service Center at Ogden, Utah; their 1972, 1973 and 1974 returns with the Internal Revenue Service Center at Fresno, California; and when they filed their petitions in this case.

Dorothy L. Nittler, Christina Allan Rustigan, and Alan H. Nittler, Trustees of the Alan H. Nittler, M.D. Medical Office Trust (hereinafter Medical Office Trust), are petitioners on behalf of the trust. The Medical Office Trust had its principal office in Santa Cruz, California, when returns were filed on its behalf with the Western Service Center at Ogden, Utah, for its fiscal years 1968, 1969, 1970 and 1971 and when the petitions were filed in this case.

Alan H. Nittler, M.D. (hereinafter Dr. Nittler), is a physician who practices nutritional medicine. On December 12, 1960, petitioners purchased approximately 76 acres of land in Aptos, California (hereinafter ranch), part of which was an apple orchard. Beginning in 1967, petitioners improved the ranch by building a ranch-style residence, a caretaker's house, barns, horse stalls and various other secondary structures. From 1960 through approximately 1967, petitioners had one full-time employee, Manuel A. Padilla, and hired three part-time employees at various times throughout this period to assist them in maintaining the ranch and in caring for the apple orchard.

Facts Relating to Issues 1 Through 3 Early in 1967, Dr. Nittler contacted Edward Zimmel, a San Jose life insurance salesman, about tax planning ideas. As part of Mr. Zimmel's tax planning, he contacted Estate Protection Service which drafted the instrument creating the Family Circle Trust. Petitioners executed the instrument on February 7, 1967, without consulting an attorney. The instrument creating the trust was revocable and designated Dorothy L. Nittler as trustor; Dr. Nittler, Dorothy L. Nittler, and Christina Allan Rustigan as trustees; and petitioners' three daughters as beneficiaries. Petitioners transferred their office building located at 113 Vine Street, Santa Cruz, California (hereinafter Vine Street property), and certain stocks and bonds to the Family Circle Trust. On August 29, 1967, petitioners amended the trust to make it irrevocable. Dorothy L. Nittler, as trustor, also surrendered any and all rights to alter, amend, or revoke the trust instrument except for appointing a successor trustee in the event of Dr. Nittler's death.

Later in 1967, Dr. Nittler hired George Nicoladze for additional tax planning. Nicoladze was an employee of Crown Trust Foundation which was in the business of promoting foundations for the Christian Church. He directed an attorney, retained by the Crown Trust Foundation, to draft an instrument creating the Alan H. Nittler, M.D. Medical Office Trust (Medical Office Trust). The trust was executed on November 15, 1967, and designated Dorothy L. Nittler, Christina Allan Rustigan, and Dr. Nittler as trustees.

The Medical Office Trust was dedicated to the "welfare of humanity" and was terminable by the unanimous vote of the trustees. Pursuant to the trust instrument, Dr. Nittler transferred his medical practice to the Medical Office Trust. The transfer was conditioned on the trust receiving tax-exempt status from the Internal Revenue Service. If tax-exempt status was denied, the trust would automatically terminate and all trust assets would revert to the grantor.

The trust instrument further provided that the trust would engage the services of Dr. Nittler, pay him a fee to provide him with a subsistence level of living, and distribute the balance to foundations dedicated to nutritional research and medical services selected by the trustees. The Medical Office Trust rented office space, where Dr. Nittler could render his services, from the Family Circle Trust. On September 24, 1968, the Internal Revenue Service denied the Medical Office Trust tax-exempt status.

In furtherance of their tax planning, on March 6, 1968, petitioners executed and had notarized articles of incorporation for Lahai Roi Foundation (hereinafter "LRF"). Although adopted in March 1968, LRF's articles of incorporation were not filed with the State of California until April 25, 1969. LRF has remained a corporation in good standing under California law ever since that time.

LRF's articles declare that it is dedicated to medical and scientific research and state the corporation's purposes and powers as follows:

1. To receive and administer any other property from any person and to hold, manage, administer and control any and all property hereafter acquired by purchase or otherwise;

2. To purchase, lease from others, and otherwise acquire, sell, convey, transfer, lease to others and otherwise dispose of, mortgage or otherwise encumber real or personal property;

3. To borrow or lend money * * *; and generally to transact and carry on any other business * * *.

LRF's articles contain no provision for, or any reference to, an agency agreement with petitioners or anyone else.

The Board of Directors of LRF held its first meeting on March 26, 1968, at which time it adopted bylaws and elected officers. The officers elected were: Dr. Nittler, president; Dorothy L. Nittler, vice president; and Christina A. Rustigan, secretary. At this meeting, there was discussion of LRF purchasing petitioners' ranch and a resolution to purchase was passed. Dr. Nittler, as president, was authorized by the corporation to execute whatever documents were required to effectuate the transfer of the ranch to LRF. Petitioners and LRF entered into an executory contract of sale for the ranch on March 26, 1968. The contract of sale conditioned the transfer on LRF receiving tax-exempt status from the Internal Revenue Service and stated, in part, that if LRF:

ultimately fails to achieve the status of an exempt organization qualified under the United States Internal Revenue Code Section 501(c)(3) and the California Revenue and Taxation Code Section 2370ld, then this sale and the transfer of the property to the Buyer by the Seller is hereby declared null and void, and the property shall be retransferred by the Buyer to the Seller, and the Seller shall thereupon cancel all notes and the parties shall be deemed to have not changed their position or ownership of assets from their status as of the date

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